Can Snap, Tencent and Baidu shares beat the social media slump?

Broader macroeconomic headwinds have brought difficulties for social media stocks such as Tencent, Baidu and Snap, with declining advertising revenue and increasing competition impacting the three companies’ share prices.

Social media stocks such as Snap [SNAP] as well as China’s Tencent [0700.HK] and Baidu [9888.HK] have fallen from their pandemic highs and been caught in a sector-wide slump as economic turbulence lead to a slowdown in advertising revenue.

While the Global X Social Media ETF [SOCL], which holds Snap, Baidu and Tencent, was up 4.5% over the past week (as of 4 August), social media stocks have had a challenging year and earnings season has only served to further demonstrate the difficulties ahead.

The sector took a bit of a hit in the last week of July. Twitter [TWTR] reported that its advertising revenue rose just 2% year-over-year in the second quarter to $1.08bn, missing analyst expectations of $1.22bn by a wide margin. The company partially blamed its ongoing dispute with Elon Musk for the miss as it has caused uncertainty for advertisers. Similarly, Facebook owner Meta [META] saw a 36% fall in net income in the second quarter, which it mostly attributed to a “weak advertising demand environment” caused by “broader macroeconomic uncertainty”.

Snap’s earnings don’t reflect its ambitions

Twitter and Meta weren’t the only social media giants to warn of a dire outlook for advertising spend. Snapchat’s holding company cautioned that it could be some time before things start to improve.

The news spooked investors, who abandoned ship and sent the Snap share price plummeting. The stock closed 39.1% lower on 22 July, the day after its Q2 results announcement, before falling to $9.34 on 28 July, its lowest level since March 2020. The stock has recovered slightly to close at $10.25 on 4 August, but it’s still down 78% since the start of the year.

Although macroeconomic headwinds have kept advertising spend down, the earnings “do not reflect the scale of our ambition,” Snap wrote in a letter to investors. “We are not satisfied with the results we are delivering, regardless of the current headwinds.”

Although the company saw a 13% increase in revenue to $1.1bn, its net losses widened 178% from $151.7m to $422.1m. The stock was hit by a series of analyst downgrades in the aftermath of the earnings report, with some concerned about the increased competition the social media platform is facing.

“TikTok’s strong engagement and rapid monetisation growth are having an outsized impact on Snap’s business,” wrote JPMorgan analyst Doug Anmuth in a research note. Anmuth lowered his rating from ‘overweight’ to ‘underweight’ and slashed the target price from $24 to $9.

Tencent looks to short-form video

China’s internet stocks were boosted back in May thanks to signals that Beijing regulators are gradually easing their tech crackdown, but they have since pulled back. Hong Kong-listed shares of Tencent have tumbled around 21% since early June, closing on 4 August at HK$312 after reaching a 52-week low of HK$288 two days earlier.

Despite this, there are reasons to be bullish on the WeChat owner. Ivan Su, a Morningstar senior equity analyst, sees Tencent as undervalued. “[W]hile we can’t predict the next policy move, we have strong confidence that Tencent will be able to navigate these headwinds over time with investments that they are already making today,” Su said.

Tencent saw online advertising revenue decline 18% year-over-year in the three months to the end of March, while its overall profits fell 52%. Monthly active users for WeChat and Weixin, the version for mainland China users, were 1.29 billion, up 3.8% on the year-ago quarter. It’s reportedly taking steps to monetise WeChat’s short-form video function, Channels, after reporting almost flat revenue growth in the first quarter of the year.

Zhang Yi, chief analyst at Guangzhou-based iiMedia Research, isn’t surprised. He told the South China Morning Post: “Channels is a product with the biggest growth and potential for Tencent over the past five years, and it will have to be able to make money for Tencent and offset waning growth from its games and advertising businesses.”

Baidu’s slow move into the metaverse

Baidu isn’t a pure play on social media. Although, it does operate Tieba and Zhidao, which are integrated with its search engine. The former is an online forum and the latter is a community-based question and answer site.

The company, which specialises in artificial intelligence, launched China’s first metaverse platform, Xirang, at the end of 2021. The hope is that social media companies will use it to build metaverse experiences for their users.

However, it warned last year that it could be six years before it’s able to fully realise the metaverse’s potential. Wedbush analyst Dan Ives told CNBC that the “timeline for Baidu is disappointing to hear for investors and a head scratcher”.

The Baidu share price is down 6.3% year-to-date and closed on 4 August 37.2% above its 52-week low set on 15 March.